1. © Suzanne Scotchmer 2010 from Innovation and Incentives MIT Press 2004 Review: The (Public Goods) Nature of Knowledge & Information Goods Longitude Example: What is the lesson? What do these have in common: Knowledge that “DNA is a double helix” software digital music Public Goods: Nonrivalness: High cost to create; zero cost to distribute or use. What is the efficiency conclusion? Nonexcludability: If the good is nonexcludable, IP will not work!!

2. © Suzanne Scotchmer 2010 from Innovation and Incentives MIT Press 2004 - p Clocks Demand curve Marginal cost Review: Private Goods: The competitive market is efficient price = marginal cost: Why is that efficient? What if a template must be developed?

3. © Suzanne Scotchmer 2010 from Innovation and Incentives MIT Press 2004 Review: Information Goods: the market doesn’t work (What is the price with free entry?) (What is the price with intellectual property?) (Isn’t public funding better? Why or why not?) mv p m dv software users vv Idea (v,c)

4. © Suzanne Scotchmer 2010 from Innovation and Incentives MIT Press 2004 What does IP do? First, IP creates (as a legal matter) excludability. –Does this “solve” the public goods problem? –What about nonrivalness? Second, IP provides at least a weak efficiency test as to whether the value of investment exceeds cost Third, IP does a bad job of delegation –It does not privilege the more efficient firms –It does not regulate entry and duplication Fourth, IP leads to deadweight loss Fifth, concentrates costs among the users

5. © Suzanne Scotchmer 2010 from Innovation and Incentives MIT Press 2004 Intellectual Property: Compared to what? Public Sponsorship? 1840’s, photography: A patent buy-out. 1960’s and 1970’s Super Sonic Transport Public support for private enterprise. 1700’s and 1800’s Lyons’ weavers Prizes in a guild Napoleon: Food preservation Invention for the public good NIH, NSF: Researcher-initiated projects NASA: Targeted government objectives

6. © Suzanne Scotchmer 2010 from Innovation and Incentives MIT Press 2004 Prizes: A simple mechanism Targeted versus blue-sky research Lyons (blue-sky) Napoleon’s food-preservation (targeted) Simple model: Invest in a blue-sky “idea” (v,c)? Why not make the price depend on cost? Why doesn’t the prize-giver get ripped off? Needs to make the price depend on value Why doesn’t the inventor get ripped off? The role of IP as a background for prizes: Photography Hyatt and celluoid

7. © Suzanne Scotchmer 2010 from Innovation and Incentives MIT Press 2004 Simple Prizes and Scarce Ideas A single inventor has an idea. He must decide whether to invest in it, and we want him to make the “right” decision. Model: An idea is a pair (v,c) where c is the cost of making the idea an innovation and v is per-period profit. (See the market diagram above.) Investment is efficient if (1/r) v > c. In the diagram, what is the defect of patents? If we were going to use prizes instead, what value of prize should we set? (How does the optimal prize relate to v? to c? How does this depend on what is observable? Verifiable?)

8. © Suzanne Scotchmer 2010 from Innovation and Incentives MIT Press 2004 Prizes: Can the prize be linked to value? How should the value of the prize be chosen? How was the prize chosen in the case of longitude? canning? The Lyonnaise silk weavers? Would it be better to link the prize to cost? What problems to patents and prize have in common?